Schlumberger: Global Supply Deficit Likely If Demand Growth Continues

The top oilfield services provider, Schlumberger Ltd, said that it predicts a substantial global supply deficit of crude if the growth in demand continues because of the massive drop in spending on production and exploration.

Since oil prices began to head south in June 2014, energy companies have slashed their production and exploration resources in half. This effort has included the use of a tactic known as high-grading, where companies have reduced drilling to focus attention on the most productive oil fields.

In a conference call Friday, CEO Paal Kibsgaard said, “As the opportunities for activity high-grading are exhausted, we should see a further acceleration in the global production decline.”

Earlier in July, the International Energy Agency (IEA) increased its initial prediction for oil demand growth to 1.4 million barrels per day in 2016 and 1.3 million barrels per day the year after that. The IEA primarily oversees the energy policies of industrial countries.

On Thursday, Schlumberger posted a slightly better adjusted profit than originally estimated in the second quarter. The company admitted that the pulling back of pricing concessions was being considered. The decision mirrored rivaling Halliburton’s own Wednesday statement that said “deep, uneconomic pricing cuts” would need to be upended.

“Inevitably, service industry pricing has to recover and as it does, this will consume a large part of the E&P investment increases intended for additional activity, which will further amplify the pending oil supply deficit,” Kibsgaard was quoted as saying. “E&P investment” refers to the
finances related to exploration and production.

Oil production companies have reported being able to pump oil continuously without spending more money because of improved production techniques that generates more oil and cheaper pricing for oilfield services.

According to Kibsgaard, these lower costs do not indicate a “permanent improvement in the underlying industry performance.” He also said that there have been no major changes in the industry’s efficiency, technology, or business model, “What has taken place over the past 21 months is instead a redistribution of the profit and cash flow shortfall from previously sitting mostly with the oil producers to now representing an unsustainable burden for the supply industry.”